Stocks rise sharply on optimism for a debt deal

Published: Wednesday, Oct. 16, 2013 10:00 a.m. CDT

Caption

(Richard Drew)

Trader Robert Charmak, left, works on the floor of the New York Stock Exchange Tuesday, Oct. 15, 2013. World stock markets fluctuated between gains and losses Wednesday Oct. 16, 2013 as a deadline for divided U.S. lawmakers to agree on a higher government borrowing limit drew ever closer. (AP Photo/Richard Drew)

Senate leaders are optimistic about forging a deal preventing a federal default and ending the partial government shutdown after Republican divisions forced GOP leaders to drop efforts to ram their own version through the House.

The Dow Jones industrial average rose 158 points, or 1 percent, to 15,326 in morning trading as traders reacted to an unconfirmed report that House Speaker John Boehner had agreed to take up a Senate compromise on raising the debt ceiling. Rates on short-term U.S. government debt also fell as investors became less nervous about a possible default.

Unless the debt limit is raised, the U.S. will hit a Thursday deadline after which it can no longer borrow money to pay its bills, increasing the chance of a default on government debt. That possibility has unnerved markets all month.

"The lawmakers know it's in our best interest for this to be settled," said JJ Kinahan, chief derivatives strategists for TD Ameritrade. "There's a belief that they'll take it as far as they can and ultimately, at the last minute, settle it."

Yields on Treasury bills fell sharply as hopes built for compromise ahead of the Thursday deadline to raise the U.S. debt ceiling. The yield on the one-month T-bill dropped from 0.40 percent to 0.26 percent Wednesday morning, an extraordinarily large move. The decline means that investors consider the bill to be less risky.

The yield on the 10-year bond edged up to 2.75 percent from 2.74 percent on Tuesday. Yields on longer-term U.S. government debt haven't moved as much as those on short-term debt because investors generally believe the government will work out a longer-term solution for paying its debts on time even as partisan gridlock in Washington holds up a short-term solution.

Fitch Ratings said late Tuesday that it may downgrade the government's AAA bond rating. The agency said it sees a higher risk for default because of the uncertainty over whether Congress will raise the debt limit. Fitch said it will make a final decision by the end of March at the latest, depending on how long any agreement to raise the debt ceiling lasts.

The dollar fell against the euro and the Japanese yen.

Among stocks making big moves:

— Mattel gained $1.88, or 4.5 percent, to $43.42, after the company's third-quarter net income rose 16 percent thanks to high demand for dolls like Monster High, Barbie and American Girl. The results were better than Wall Street analysts had forecast.

— Bank of America rose 22 cents, or 1.5 percent, to $14.46 after the second-largest U.S. bank reported that it earned $2.5 billion in the July-September period, up from $340 million a year earlier. On a per-share basis, earnings were 20 cents, beating the 19 cents expected by financial analysts.

— Stanley Black & Decker plunged $12.60, or 14.1 percent, to $76.68 after the company lowered its profit forecast for the year, citing slower growth in emerging markets and a hit from the U.S. government shutdown.